Global coking coal price forecast (April 2014)

Metal Expert Consulting continues to publish open quarterly reports to share its understanding of the coking coal market development in a medium- and long term and compare it with the consensus forecast of investment companies and analysts.

In January-March, a downturn was seen in the global market of coking coal: the key consumers cut purchases that induced a downfall of spot prices for HCC ranks to $113/t FOB Australia (against contract prices of $113/t FOB Australia in Q1), the lowest level of recent 6 years. According to preliminary data, Australian suppliers and Japanese consumers of hard coking coal have concluded contracts for Q2 at $123/t FOB Australia.

Demand from Chinese and Japanese consumers of coking coal is weakening. Steelmaking is going down in China, while production of pig iron and coke stays rather high. Comparing the data of January-February 2013 and January-February 2014, we can see the growth of warehouse stocks in China: the country’s coke production grew by 2% y-o-y to 7.6 million t in January-February, exports increased from 170,000 t to almost 1.5 million t. According to mysteel.net, warehouse stocks of the 50 largest coke producers reach 186,000 t. This has an adverse impact on coking coal consumption. Warehouse stocks of coking coal increased significantly in Q1 (according to mysteel.net, they were sufficient to secure 21 days of operation in February), partly due to Chinese consumers that boosted imports of coal in January by 18% y-o-y.

Japan cannot support world prices for coking coal, because the country’s production of pig iron dropped by 17% to 6.2 million t in February against January. Purchases of import material are going down.

Forecasts of investment companies prepared before February have been disregarded because of a sharp drop of global coking coal prices. We have considered only reports published in past two months when preparing our consensus forecast.

Almost all the investment companies believe that current prices for coking coal are nearly bottom-low and they will start recovering in Q2.

Note: To get the forecasts, all available prices have been adjusted to a common benchmark basis – the FOB Australia price for hard coking coal.

Comparison of actual coal prices in Q1 and Metal Expert Consulting’s forecast published at the end of 2013 report shows that we have overestimated the probability of spot prices reaching the level of contract prices. The inaccuracy of our forecast was about 20%. Meanwhile, the investment companies’ forecast is $17/t or 12% away from actual figures.

Comparison of coking coal price forecast accuracy of MEC and industry analysts over the past year

The graph below shows comparison of Metal Expert Consulting’s renewed export price forecast for Australian hard coking coal with the prices that investment and industry analysts expect (adjusted to the same basis).

Metal Expert Consulting’s quarterly report till the end of 2015 is based on the Company’s own methods and methods of non-linear dynamics. We suppose that dynamics of coal prices will differ from expected changes in iron ore prices in Q2-Q3 at least. The reason is that export prices for Australian coking coal have recently lost much more than prices for other metallurgical products, domestic prices for Chinese coking coal and world export prices for steam coal. In Metal Expert Consulting’s opinion, this proves that the benchmark of coking coal is currently being underestimated and there is a potential for the price increase when demand from Asian companies recovers.

Metal Expert Consulting estimates, the global price for coking coal has nearly reached bottom-low level. In Q3, it is expected to recover to $135-140/t FOB Australia. High price volatility will be registered in 2015 as well.

Metal Expert Consulting’s medium and long term price forecast for coking coal is generally in line with the minimum forecast of investment companies. We expect that new suppliers of coking coal with lower production costs (as compared to the average ones) enter the market, competition toughens and the leading suppliers have their profitability decreased that will push down the average annual prices. However, prices are not likely to descend below $150/t in a long term.

In early 2014, production costs of the most efficient suppliers were $60-70/t (profitability makes 70-80% at current prices), the average costs (production and transportation) in the market were $90-100/t FOB (profitability being 65%). Supposing that production costs increase by 3-5% per year during this decade because of inflation, higher expenses on salaries, equipment, power carriers and fuel, possible increase in royalty and taxes, etc., we expect coal suppliers will have their costs increased by $30/t at least by the end of the decade. Thus, the minimal operational profit margin (30% that corresponds to the average market margin of 52%) can be reached when prices for hard coking coal are about $150/t which is forecast by Metal Expert Consulting.